RDSP #1 Barrier: The 10-Year Rule

From December 2008 to December 2010, Canadians opened 41,060 RDSP’s, which represents only 9% of the eligible population.

So why have the existing 91% of Canadians not accessed the RDSP?

Throughout the summer, we’ve been discussing the possible barriers to accessing the RDSP. But before we launch into the final barrier – it’s important to acknowledge that we’ve been talking A LOT about “barriers”, and maybe we should have named this series as “Top Ten Possible Adjustments” or “Top Ten Opportunities for Change” because we are really talking about tweaking the RDSP and making adjustments to an existing policy. Your survey comments have made us realize this when people have said: “I don’t think any changes are needed – we should be grateful to the Government for starting the RDSP!”

Still, less than 10% of the eligible population has accessed the RDSP and the majority of survey respondents have identified that the number one barrier to the RDSP is the 10-year rule. Families have told us: “10 years is too long to wait”, and that “ people with disabilities have different needs – most of us wont live as long and we need to access our savings earlier”.

So here we go:

The policy in the box:

If a person receives grants or bonds from the government, they must wait 10 years after the last contribution in order to withdraw money from their RDSP account

In other words – the RDSP is a (very) long-term savings plan

Paul is 20 and has just opened an RDSP

He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.

Paul must wait until he is 50 years of age to access his RDSP savings

Why is there a 10-year rule?

It’s important for us to understand why this rule exists in the first place. There are two main reasons:

To prevent tax “slippage”: a person could use the same money to get government contributions year after year. For example, Paul contributes $1,500 in 2008 and receives a matching $3,500 from the federal government. In 2009, he withdraws $1,500 from the RDSP and then re-deposits it. Paul gets another $3,500 from the federal government. In other words, he would receive $7,500 from the federal government for his $1,500 contribution. That would defeat the purpose of encouraging personal saving.

To make the RDSP a long-term savings plan: The RDSP was not intended to act like a bank account, where a person could make contributions and withdrawals as needed. Nor was it intended to act like an income program, where federal contributions are considered an income supplement each year.

The question remains: Is it possible to achieve these two public policy goals while at the same time reducing the 10-Year rule?

We think so.

As we’ve discussed in previous blogs, there may be a need to call for parity or parallelism between the RRSP and the RDSP. People who have an RRSP are given an opportunity to withdraw money for real estate or educational purposes, tax-free. Could there not be something similar for the RDSP? For example, if someone wanted to buy a new home, or make an important medical equipment purchase could they make a special withdrawal from their RDSP and not be penalized? Perhaps there could be a maximum number of times one could make withdrawals in a lifetime and as well as a maximum withdrawal amount.

Some of you have suggested to decrease the 10-year rule to 5-years or 2-years. Recently Minister Flaherty did make some changes to this rule in the latest federal budget, by reducing the 10-year rule to 5 years if and only if, the beneficiary has 5 years or less to live. This is a step in the right direction and shows the willingness of the Canadian Government to make adjustments to the RDSP. However, as many of you pointed out in the survey – most of us don’t know what the future holds, and seems reasonable to be able to access saved funds when they’re needed most.

27 Responses to “RDSP #1 Barrier: The 10-Year Rule”

Brian king

Don’t understand this 10 year rule..my daughter has contributed the max and hasn’t made any withdrawals but now they say she doesn’t qualify even though her phycharitrist ( of 10 years) still supports her disability …now CCRA wants a report from her GP etc to keep the file open…this plan looks like a reason for the Government to offload their responsibility now and maybe deal with it later when the disabilities come pouring in and let their successors fix it…Our former finance minister, Jim Carney, introduced this benefit and sure he didn’t invision this debacle…we have not received a reasonable explanation as to why my daughter’s claim is denied…sure many others are upset

Nicola Dunne

From the information you have shared, it appears that your daughter has lost her DTC? If this is the case, your daughter may need an appeal. For queries related to DTC issues and appeals we would refer you to Ability Tax and Trust Tel: 604-630-0333. If you have any further questions, you can also contact our helpline on 1-844-311-7526.
Nicola

naveed ali

Isn’t the real underlying reason for the 10 year rule because the government basically ensures that the money we invest can generate guaranteed interest for them for a minimum of 10 years? If we contribute $1500 in and that stays for 10 years, it is quite possible that the government makes close to that or even that much or more in investments while it stays put for 10 years. For the most part, the government knows that the money will sit 10 years as most people will wait that time limit. The bond and the grant is virtual money, its in the account balance but its not really there until the 10 year limit is passed so the government also plays around and generate incomes that way. For example, it sets aside $3500 plus $1000 (bond and grant) so it sets aside $4500 a year for a RDSP recipient. Its in our account but not really there, its still in the governments hands. So even that $4500 over 10 years generates income for the government. Is this not the real reason for the 10 year rule? In reality the tax payers aren’t coughing up $4500 for every $1500 we invest??????

Nicola Dunne

Hello Naveed,
The 10-year rule is meant to encourage long-term savings as the RDSP is a long-term savings plan, not intended to be used as an alternative to a daily savings account. While we recognize it has its limitations, the 10-year rule, was developed as a safeguard to ensure long-term growth and savings for the future.

CeeDee

I missed the feedback questionnaire so I’ll respond here and also ask a question.

Regarding the dreaded 10 – year rule I’m thinking an adaption could be made for those of us who were in our late 40’s when we contributed enough to receive the grants and bonds. It isn’t like we can remove 1,500 and reinvest in the RDSP if federal contributions no longer apply – yet, waiting a decade with an uncertain future before accessing, penalty-free…..is not making me comfortable. Especially if you only have VERY limited funds and even a few hundred dollars can make or break meeting basic needs.

Question: Just to be sure — when mandatory withdrawals come about can you put that money into your bank’s savings account and not spend it? Is that still considered an exempt asset by provincial disability standards? Thank you.

Adam

Hi. Thank you for your comments about the 10 year rule. We appreciate you taking the time.

When it comes time to withdraw your RDSP money, you can spend it as you see fit. To see how your province treats payments from your RDSP, please visit this page on our website: http://www.rdsp.com/tutorial/provincial-resources. Thanks for reaching out.

Kate

I have a question about RDSP payments….am I allowed to access the money that I personally contribute to the RDSP before the 10 year period? Say I have $10,000 in my RDSP, $5000 from my own contributions and $5000 from government contributions…..if I take out $3000 from my RDSP before the 10 year period do I still have to repay a portion of the amount even though I have only technically withdrawn from my own contributions?

As well, if I receive a one time payment (DAP) from the RDSP before the 10 year period, does this mean I can no longer make any more contributions to the plan after this payment?

Adam

Hi Kate. If you receive a federal government grant or bond, there is a “holdback period” of 10 years from the year of the last federal contribution. Note that there has been a recent change in the penalty: Up until the end of 2013, if you made a withdrawal from your plan during that period, you would have had to pay back all funds received from the federal government in the past 10 years. As of January 2014 however, this rule changed to become a “proportional repayment rule” so that for each $1 withdrawn from an RDSP, only $3 of any grants or bonds paid into the plan in the 10 years will need to be repaid.

In terms of making contributions after a withdrawal, while it is possible, we recommend connecting with your financial advisor to discuss. They can help you plan the best way forward. Thanks so much.

Dave R.

Clearly, the 10-year wait period rule as it now exists is ridiculous. Obviously a beneficiary should not have to wait 10 years after the last grant/bond was received, The wait period should begin day one for each yearly contribution/grant/bond so that after 10 years, a beneficiary could begin to withdraw the total year one contribution/grant/bond/interest amount without penalty, while continuing to contribute until the $70000/$20000 limits have been reached. This would achieve the goal of the plan: long term growth, savings and income supplement, while allowing the beneficiary to actually use their funds when they need them (however, see next point re. withdrawal limits). Otherwise the government contributions are “virtual” bonds/grants at best.

The other less discussed concern is the rule limiting the amount that can be withdrawn per year. You would think that after waiting 10 years you would be able to withdraw at least one year’s worth of contribution/bond/grant/interest per year (for example, $6000 + interest, or about $650 per month assuming a modest avg. return of 2.7%). Not so. The limit is based on the value of the fund divided by 83 year life expectancy minus current age. So a 40-year-old with $150000 in the plan would be limited to only $290 per month. At age 70 this individual would still have over $100000 in the plan. Once again, it is “virtual” money that will never directly benefit the beneficiary. And withdrawing until age 70 is optimistic considering many disabilities are associated with a much shorter life expectancy. On this point, please clarify your statement elsewhere on this website that states the withdrawal amount is limited to, “…either the money in your RDSP divided by the number of years before you turn 83, or 10% of the amount in the plan per year.” I have not seen this 10% option mentioned anywhere else. If true, this last point is resolved and my concern would be gone (unless this is a “whichever is less” situation).

Barriers indeed. No wonder less than 10% of qualifying individuals take advantage of the RDSP, and why I too am considering closing the plan (my bad for not knowing about the barriers prior to contributing back in 2008, although research at the time did not expose them).

Adam

Hi Dave – Thanks for your comments. You’re right that the RDSP not a short term solution, and other programs and services may be required for immediate needs. And while the RDSP isn’t right for everyone, it does benefit a lot of people. Here’s a few points to consider (you may already know them):

1. The reason the government set it up so that one must wait 10 years to withdraw from an RDSP is because it’s designed as a long term savings vehicle, much like a pension or RRSP that saves money for retirement. If you wait longer, your RDSP investments have more time to grow.

2. The ten year rule can be reduced however, if there is a shortened life expectancy

3. You actually can withdraw money before 10 years, you just would pay a penalty on the grants and bonds. However the requirements have gotten more flexible. In January 2014, the CRA reduced the repayment rules on a proportional basis, on a $3 to $1 basis. That means you may not have to pay everything back if you need to make an emergency withdrawal. But we don’t recommend this unless necessary.

4. RDSP’s payments have a default setting to automatically follow a formula, starting at age 60, to make the money last for the long term. But you are not forced to follow this:
-First off, depending on how much you contributed, you can either withdraw up to 10% of the value of the plan per year, or all of the RDSP at once.
-Two, while RDSP payments must begin at age 60, they can be started at any time. Just be sure to wait until 10 years after the last grant or bond contribution or you will pay a penalty on some of those grants and bonds. We recommend playing with our RDSP Calculator here: http://www.rdsp.com/calculator/ You can see that one could open an RDSP at, say, age one. Maximize the grants and bonds by age 21, and then after a ten year waiting period, start making withdrawals as age 31. There are many possible scenarios.

Carolyn Renee

I am so confused.
As I was not able to contribute until later in my life, this program really doesn’t benefit me too much.
All I wan to do is close my RDSP account and receive MY contributions. The government can have all of their bonds and grants back.
I was eligible beginning in 2008 and have contributed since.
I only have $4500 of my own contributions in there.
I should be able to do this, shouldn’t I?

Adam

Thanks for your questions. Yes, you can close your RDSP and recover the money you’ve invested. All grants and bonds earned in the previous 10 years will be returned to the government but you get to keep any interest growth that may have happened. Though you would be taxed on the interest growth in the year you made the withdrawal.

Before you go that route, it’s important to consider all your options. There may still be benefits to keeping your RDSP. Can we contact you by email to discuss? Or, if you prefer, you can call our Toll-Free Helpline at 1-844-311-7526.

CAnderson

I just received a notice that I am eligible, but, I don’t know???? I can only contribute until Dec. 31 as I am 49. I will have to wait until I am 59 to take the money out, but if something should happen to me, my son would not receive the bond or grant. Am I correct? I think 10 years is too long for people with a disability. I would definitely like to see this rule tweaked.

Helene Eschbach

Hi CAnderson,
If you open an RDSP now, and your DTC went back a number of years, you will be able to contribute for up to three years and receive matching grants.
If your income is modest, you will also be eligible to receive bonds. We are always working on ways to improve the RDSP. We give the government feedback about what individual’s concerns are. We never share names or any other personal information.

This is so confusing- no one made me aware that this was available for me I have been on ODSP most of my adult life due to having uncontrollable seizures- grandmal or generalized tonic-clonic seizures. I got my RDSP opened on April 10, 2013 at 48yrs of age. Will the government continue to match three dollars to my one dollar after I turn 50? I feel that it was unfair that at the very least ODSP should have given me the heads up years ago that this was available for me. I hope the government will continue to match my money as I will need all the help I can get in my elderly years to help me keep a roof over my head and food on my table. I have lived month to month on my disability never able to put away for my future not really looking that far ahead until I was able to get this RDSP. But with my epilepsy it is hard for me to retain all the in and outs the dos and don’ts that apply to this. Could someone help refresh my memory on how this matching process works and for how long?

R. Paquet

I started contributing to an RDSP for my son who is 14 last year, but the government says I can now go back as far as 2008 to carry-forward, which if I do makes him 10 when he stared to contribute. Am I right in assuming that if I continue to make contrubutions up until 2028 I will have maxed out the governments grants when he is 30 and not 34, and thus will only have to wait until he is 40 to retrive the money without penility for him?

Hi,Yes, if you max out the grants ($70,000)in 20 years, starting from 2008, and are either not receiving the bond, or have maxed it out too ($20,000), then indeed, you would only need to wait an additional 10 years before accessing the funds without penalty.

If the beneficiary’s annual family income is less than or equal to $87,123 for 2013, the Government of Canada pays:

a 300% Grant on the first $500 in annual contributions made to an RDSP and
a 200% Grant on the next $1000 in annual contributions.
If the beneficiary’s annual family income exceeds $87,123 for 2013, the Government of Canada pays:

a 100% Grant on the first $1,000 in annual contributions made to an RDSP.

As for the possible penalty: There will soon be a new Proportional Repayment Rule. Instead of ALL grant and bond money being paid back if ANY withdrawal took place for the 10-year period after a government contribution (like it currently is) — As of Jan 1, 2014 within that same 10 years, for each $1 taken from an RDSP, only $3 of any grants or bonds paid into the plan would need to be repaid, up to a maximum of the assistance holdback amount.

andrew g

Ted Norton

You’re assuming that Paul continued to make contributions beyond age 40 and up to age 49. If Paul is 20 years old and makes 20 years of contributions at $1500/year, assuming he is eligible for maximum grant and bond money, Paul will have received $3500 in grant money for 20 years (i.e. $70,000) and $1,000 in Bond money for 20 years (i.e. $20,000) and would thus have reached the lifetime limit for grant and bond money. Although Paul could continue to contribute his own funds to his RDSP until age 49, without any more grant or bond money coming his way, he has little incentive to do so. So, the chances are Paul would stop making personal contributions at age 40, wait out the next 10 years until he is 50 years old and then withdraw RDSP money starting at 50 years old without penalty.

Joe Smith

This example I believe is incorrect. The example is “The policy in the box:

If a person receives grants or bonds from the government, they must wait 10 years after the last contribution in order to withdraw money from their RDSP account

In other words – the RDSP is a (very) long-term savings plan
Paul is 20 and has just opened an RDSP
He wants to access the full grant or bond (and not return any funds to government) so he must wait 30 years from the time of making his first deposit before accessing his (or the government’s) contributions – 20 years of contributions plus 10 years of waiting for the holdback amount to diminish to 0.
Paul must wait until he is 50 years of age to access his RDSP savings
”

I believe Paul must wait until age 59 since he is making contributions up to age 49.

Our understanding is no, you cannot access the total from Year 1. Rather, you must wait 10 years, after the last government contribution is made. See the below statement of the Government HRSDC website:

Withdrawals from your RDSP are called “payments” and ANY payment is made from an RDSP, then there is a holdback amount – payable to the federal government for the grant/bond contributions. After 10 years, the holdback amount is zero and payments may be made without repaying any funds to the federal government.

Anya

I’m still unclear about the 10-year rule, as I am receiving conflicting information between this site and my bank rep who opened up my RDSP. Let’s say I’ve been receiving the full bond and grant on an annual $1500 contribution for 10 years. In Year 11, do I now have access to the total amount from Year 1 (my $1500 contribution+grant+bond), it now having been there for a full 10 years?